Voluntary Disclosure Decisions Research Articles

IRS Enforcement and Voluntary Tax Disclosure

ABSTRACT Although voluntary tax disclosures can improve firms’ information environments and reduce financial statement users’ costs of processing complex tax information, they can also inform tax authorities about tax avoidance strategies. This study explores the content of voluntary tax disclosures during quarterly earnings announcements and conference calls to examine the effect of IRS enforcement on managers’ voluntary tax disclosure decisions. We estimate a negative relation between IRS enforcement and voluntary tax disclosures that is concentrated in the subset of firms with high levels of tax avoidance. These results are consistent with managers having concerns about the potential costs of voluntary disclosures to tax authorities. In supplemental analysis, we find results consistent with voluntary tax disclosures benefiting analysts, but at the cost of increasing IRS attention. Collectively, our results suggest an unintended negative effect of IRS enforcement on the information environment. Data Availability: Data are available from the sources cited in the text. JEL Classifications: H25; M41; M48.

The kind of silence: managing a reputation for voluntary disclosure in financial markets

We create a continuous-time setting in which to investigate how the management of a firm controls a dynamic choice between two generic voluntary disclosure decision rules (strategies) in the period between two consecutive mandatory disclosure dates: one with full and transparent disclosure termed candid, the other, termed sparing, under which values only above a dynamic threshold are disclosed. We show how parameters of the model such as news intensity, pay-for-performance and time-to-mandatory-disclosure determine the optimal choice of candid versus sparing strategies and the optimal times for management to switch between the two. The model presented develops a number of insights, based on a very simple ordinary differential equation characterizing equilibrium in a piecewise-deterministic model, derivable from the background Black–Scholes model and Poisson arrival of signals of firm value. It is shown that in equilibrium when news intensity is low a firm may employ a candid disclosure strategy throughout, but will otherwise switch (alternate) between periods of being candid and periods of being sparing with the truth (or the other way about). Significantly, with constant pay-for-performance parameters, at most one switching can occur.

Impact of IFRS adoption on the disclosure of management forecasts by industry concentration

ABSTRACTWe aim to investigate the impact of the adoption of the International Financial Reporting Standards (IFRS) on a firm’s strategic voluntary disclosure decisions under different product market conditions. In the corporate world, firms tactically decide the level of voluntary disclosures considering their benefits, like resolving information asymmetry in the financial market, and costs, like providing proprietary information to their rivals. The adoption of IFRS has affected the demands in the financial market for complementary information, and therefore, it would affect the incentive to withhold corporate information in consideration of proprietary costs in the product market. Using a sample of Korean firms, we find that the likelihood of withholding management forecasts in concentrated industries is weaker in the post-IFRS adoption phase than in the pre-IFRS adoption phase. This is because there are greater demands for corporate disclosures for firms in concentrated industries in the post-IFRS adoption phase than earlier. Moreover, we find that the influence of IFRS on the decision of firms in concentrated industries to disclose management forecasts is significant only for firms with higher market power and higher financial leverage.

Product Market Competition and Voluntary Corporate Social Responsibility Disclosures†

ABSTRACTThis study examines whether and how firms' voluntary forward‐looking nonfinancial disclosure, specifically their corporate social responsibility (CSR) disclosure, is associated with the intensity of product market competition (PMC). Despite the importance of the proprietary cost argument in explaining corporate disclosure incentives, there is little empirical evidence of the relationship between firms' proprietary cost concerns and their voluntary nonfinancial disclosure decisions. Using a reduction in industry‐level import tariffs as an exogenous shock to competition intensity, we find that the likelihood, frequency, and length of stand‐alone CSR reports decrease in response to heightened PMC. We also find that higher PMC intensity is associated with a reduced likelihood of CSR disclosure with external assurance, CSR disclosure in accordance with the Global Reporting Initiative guidelines, and CSR disclosure integrated with financial statements. Our results are robust to multiple alternative measures of PMC—namely, the level of nonprice competition, product similarity, and managers' perceptions of competition. Further analysis suggests that firms facing intense competition tend to commit more resources to advertising activities after reducing their CSR disclosure, presumably to mitigate the effect of this reduction. Overall, our findings suggest that proprietary cost concerns reduce firms' incentive to report their competition‐sensitive CSR activities.

Equity financing incentive and corporate disclosure: new causal evidence from SEO deregulation

We provide new causal evidence for the impact of equity financing incentive on firms’ voluntary disclosure decisions by exploring the 2008 seasoned equity offering deregulation, which exogenously facilitates small firms’ access to public equity financing and increases their equity issuance incentives without changing their business and information environments. We argue that the heightened equity financing incentive due to the deregulation can motivate a firm to increase disclosures even in the period without actual equity issuance, because such disclosures, by signaling a commitment to disclosure, could reduce the cost of equity in case the firm issues equity in the future. Consistent with this argument, we find that, benchmarking against control firms that are not affected by the deregulation, an average treatment firm that is affected by the deregulation but does not issue equity provides more management earnings forecasts in the post-deregulation period. The effect is mainly driven by repeated forecasters and is more pronounced for firms with greater equity financing needs and firms with higher information asymmetry in the equity market.

Why Are Voluntary Disclosure Decisions Persistent? Evidence From Bayesian Hierarchical Modeling

Why Are Voluntary Disclosure Decisions Persistent? Evidence From Bayesian Hierarchical Modeling

Silence is safest: Information disclosure when the audience’s preferences are uncertain

We examine voluntary disclosure decisions when firms are uncertain about audience preferences and are risk averse. In contrast to classic “unraveling” results, some firms remain silent in equilibrium. Silence is safer than disclosure; silence reduces the sensitivity of a firm’s payoff to audience preferences. Increases in firm (audience) risk-aversion reduce (increase) disclosure. Our model explains why some firms do not disclose earnings breakdowns, executive compensation, or Environmental, Social, and Governance (ESG) performance when they face diverse audiences, and why they disclose less under regulatory rules mandating that disclosure be entirely public.

The need to validate exogenous shocks: Shareholder derivative litigation, universal demand laws and firm behavior

Several recent studies argue that the adoption of universal demand (UD) laws represent an exogenous decline in litigation risk by increasing the procedural hurdles associated with shareholder derivative litigation. This study examines how UD laws affect the incidence of derivative litigation risk and related decisions. We show that the adoption of UD laws had no meaningful impact on derivative litigation from 1996 to 2015. We also find no evidence that UD laws affect aggressive accounting, voluntary disclosure, executive compensation, or corporate governance decisions. Collectively, our findings cast doubt on the validity of using UD laws as an exogenous shock to litigation risk.

Information acquisition and voluntary disclosure with supply chain and capital market interaction

We investigate a firm’s information acquisition and voluntary disclosure decisions regarding demand forecast information. We study the interaction among the firm, its supplier, and the external capital market investors who assess the firm’s interim equity price. We first analyze when it is beneficial for the firm to acquire demand forecast information, and if such information is acquired, when the firm should disclose it to the supplier and investors. Then, we investigate how the firm’s information acquisition and disclosure decisions influence the investors’ and the supplier’s pricing strategies. We show that the optimal information disclosure policy for the firm is highly dependent on the corporate myopia level (CML): when the CML is low, the firm discloses low demand information only; when the CML is medium, the firm always withholds demand information; and when the CML is high, the firm discloses high demand information only. Our findings provide a novel plausible explanation to firms’ non-disclosure behaviors commonly observed in practice and highlight the importance of considering the interaction between the supply chain and the capital market.

Revising A Voluntary Disclosure Decision

ABSTRACTPublic information that becomes available after a manager's initial voluntary disclosure decision creates incentives for her to reconsider and possibly change that decision. We show that if she has private information that is value-relevant or that impacts the firm's ability to compete in its product market, the option to revise an initial disclosure decision in the face of a public release of information alters both the initial decision and the overall frequency of disclosure. These effects are amplified if she believes that public information arrival is more likely or if the firm's value is more sensitive to it. We also show that an increase in the initial disclosure cost reduces the probability of an initial disclosure and increases the probability of a subsequent disclosure. These effects are reversed if the cost of a subsequent disclosure increases.

The Need to Validate Exogenous Shocks: Shareholder Derivative Litigation, Universal Demand Laws and Financial Reporting Decisions

Several recent studies argue that the adoption of universal demand (UD) laws represent an exogenous decline in litigation risk by increasing the procedural hurdles associated with shareholder derivative litigation. This study examines how UD laws affect the incidence of derivative litigation risk and related decisions. We show that the adoption of UD laws had no meaningful impact on derivative litigation from 1996-2015. We also find no evidence that UD laws affect aggressive accounting, voluntary disclosure, executive compensation, or corporate governance decisions. Collectively, our findings cast doubt on the validity of using UD laws as an exogenous shock to litigation risk.

Socio-emotional wealth preservation and KPI voluntary disclosure quality

PurposeThe purpose of this paper is to examine the effect of the emotional attachment strength of family members to their business on the quality of the voluntary disclosure of their key performance indicator (KPI). More specifically, the authors focused on the effect of two dimensions of the socio-emotional theory, i.e. “family influence and control” and “firm dynasty succession.”Design/methodology/approachThe authors performed a content analysis of annual reports for a sample of 87 French families listed in CAC All-Tradable to calculate a disclosure quality index of KPI. The authors proxied the “family influence and control” by the proportion of family members appointed in the board. To identify the “firm dynasty succession” concern, the authors classified firms according to the generation they belonged to. The authors estimated a cross-sectional linear regression model to meet the research objective.FindingsThis study confirms the role of the family affective attachment in decreasing the quality of KPI disclosure in such a way to preserve its socio-emotional wealth. The family firms’ principals who desire to sustain their control on the firm, to perpetuate the business for future generations and to protect their emotional wealth tend to avoid the disclosure of credible and reliable KPI information.Practical implicationsThe findings have meaningful practical implications. First, they provide relevant insights into the regulatory bodies of the financial reporting regarding the increasing appeal for making KPI disclosure mandatory. Second, as the family businesses are the most widespread proprietorship in the French context, the effect of the family agenda on the quality of the KPI should be of interest to various policymakers and financial statements’ users of such firms. Third, the results inform nonfamily shareholders regarding the importance of selecting representatives on the board that should share similar interest with regard to KPI disclosure.Social implicationsFrom a societal perspective, this study is relevant in taking into account the critical role the family businesses have in the French economy. This study should help the minority shareholders to protect their interests and maximize their wealth within the family firm because it sheds light on the influence that family members have on hiding key information on the firm’s real performance.Originality/valueTo the best of the authors’ knowledge, no prior study in the family firms literature has examined the quality of voluntary disclosure of KPI. Although most previous studies merely compared family and nonfamily firms in terms of voluntary disclosure, the authors acknowledge and address the heterogeneity between family firms. The authors contribute to the few prior empirical validations of SEW implication on voluntary disclosure decisions by testing the effect of an additional dimension, which is family dynasty.

Tacit Collusion and Voluntary Disclosure: Theory and Evidence from the U.S. Automotive Industry

We develop a model of voluntary disclosure and production decisions and use it to establish that firms will tacitly collude by disclosing when current market demand is low and when the decision horizon is long. Low demand helps sustain tacit collusion, because deviation from tacit collusion yields only a limited increase in profit when demand is low. Similarly, longer decision horizons give firms incentive to receive the benefits of collusion over a longer period. Using monthly production forecasts issued by the Big Three U.S. automobile manufacturers, we show that the frequency, horizon, and accuracy of the production forecasts increase when demand decreases and when the firms focus more on long-term profit. Collectively, the evidence suggests that firms use voluntary disclosures to tacitly collude. This paper was accepted by Brian Bushee, accounting.

Managers' Voluntary Disclosure Decisions and Business Press Attention

I investigate the relation between business press attention and the incidence and properties of managers' voluntary disclosures. Specifically, I examine managers' disclosure responses to a bad news event: material lawsuits against the firm. I posit that managers' disclosure decisions are affected by press attention of this event, since press attention draws additional stakeholders' attention and increases information demand. Examining managers' voluntary Form 8-K Item 8.01 filings, I find that both anticipated and actual press coverage of the lawsuit event are positively associated with the likelihood and timeliness of these filings. Moreover, I find that press attention is associated with several textual characteristics of the filings, including length, tone, and complexity. My study extends a growing literature on the monitoring role of the press and suggests that managers' disclosures of bad news respond to anticipated and actual press scrutiny.

Voluntary disclosure of individual supervisory board compensation in public family firms

In family firms, the decision to voluntarily disclose individual supervisory board compensation induces confidence in the family firm's governance system, but may also compromise a family's efforts to keep exclusive control. Drawing on socioemotional wealth (SEW) research, we investigate family influence on a firm's voluntary disclosure decisions while distinguishing between different types of firms: non-family, true family (TFF), and lone founder firms (LFF). Our findings demonstrate the complex influence of two control-enhancing factors, family CEO and high ownership concentration, on disclosure decisions.

Determinants of Voluntary Greenhouse Gas Emission Disclosure: An Empirical Investigation on Turkish Firms

Firms worldwide have been facing an increasing pressure to disclose their Greenhouse Gas (GHG) emissions since GHG emissions are seen as the main source of global warming which is one of the most challenging problems that the world is faced with. For this reason, voluntary GHG disclosure represents a growing area of research interest. However, the existing research generally focuses on developed countries. In this sense, the present paper aims to contribute to the existing GHG disclosure literature by analyzing the determinants of voluntary disclosure of firms operating in a developing country, Turkey. The effects of both financial characteristics and board structures of firms on voluntary disclosure decisions are analyzed as the possible determinants of GHG disclosures of Turkish firms. We use two proxies for assessing the firms’ GHG disclosures. The first proxy, “sensitiveness tendency”, indicates the response behavior of firms to the Carbon Disclosure Project (CDP) survey. The second proxy, namely, “transparence tendency”, represents the disclosure behavior of firms. Using logistic regression models with a sample of 84 listed Turkish companies which were included in the Carbon Disclosure Project survey in 2014, 2015 and 2016, we find that firm size, institutional ownership and market value are positively related to the sensitivity of sampled firms, while board size is negatively related. On the other hand, our results indicate that firm size, profitability and institutional ownership have positive impacts on the transparency of Turkish listed firms.

The Effect of Voluntary Disclosure on Investment Inefficiency

Firms' ability to voluntarily disclose or conceal information may affect their investment decisions. In particular, voluntary disclosure in the presence of uncertainty about information endowment (a la Dye 1985) induces firms to choose the riskier among projects with equal expected returns (Ben-Porath et al. 2017). We study multi-stage investment decisions in which the firm's manager first chooses between projects with different riskiness and later may privately learn additional information about the technology of the chosen project. If informed, the firm can voluntarily disclose the new information to the market. Finally, based on the available information the manager determines the scale of the investment. If uninformed, the manager cannot tailor the investment scale to the realized technology. The resulting decrease in expected cash flow is higher for a riskier project. We study how a manager, who cares about both the firm's stock price (myopic incentive) and the long-term cash flow, optimally chooses the project and the voluntary disclosure decision, and how the investment efficiency varies with managerial myopia and information environment. As expected, managerial myopia always (weakly) decreases overall investment efficiency. However, information environment (the probability of obtaining information) may have a non-monotonic effect on overall investment efficiency. We extend the base model to allow for costly information acquisition and show that main results still hold.

Voluntary disclosure and the pricing of earnings components

This study examines the association between earnings components, corporate voluntary disclosures and market reactions to the contents of the disclosures. Taiwanese listed firms report substantial non-operating income. I disaggregate earnings into three components: operating income, equity investment income and other non-operating income. I first investigate whether earnings components have different influences on a firm’s voluntary disclosure decision as measured by conference calls. I find that firms with higher operating income and with higher other non-operating income are more likely to hold conference calls. Consistent with the corporate control contest hypothesis, this paper provides evidence on the negative association between a firm’s equity investment income and its decision to hold conference calls. Furthermore, I investigate how voluntary disclosures provided by management during conference calls affect the pricing of earnings components. I find that the mispricing of earnings components are smaller for firms hosting conference calls. My findings suggest that conference calls improve the efficacy of investors’ reactions to earnings announcements in the Taiwanese stock market by conveying information on earnings components.

The effect of economic policy uncertainty on investor information asymmetry and management disclosures

Investor uncertainty about firm value drives investors’ information collection and trading activities, as well as managers’ disclosure choices. This study examines an important source of uncertainty that likely cannot be influenced by most managers and investors: uncertainty about government economic policy. We find that this uncertainty is associated with increased bid-ask spreads and decreased stock price reactions to earnings surprises. Managers respond to this uncertainty by increasing their voluntary disclosures, but these disclosures only partly mitigate the bid-ask spread increase. We conclude that government economic policy uncertainty is an important component of firms’ information environments and managers’ voluntary disclosure decisions.

Competition and voluntary disclosure: evidence from deregulation in the banking industry

We use the relaxation of interstate branching restrictions under the Interstate Banking and Branching Efficiency Act (IBBEA) to examine how increases in competition affect incumbents’ voluntary disclosure choices. States implemented the IBBEA over several years and to varying degrees, allowing us to identify the effect of increased competition on the voluntary disclosure decisions of both public and private banks. We find that increases in competition are associated with an increase in press releases. Overall, press releases become more negative in tone as entry barriers decrease. However, disclosures by public banks and by banks issuing equity become incrementally positive in tone when entry barriers decrease. Thus, the increase in disclosure is consistent with a dominant incentive to deter entry via negative information, which is mitigated by an incentive to communicate positive information to investors.